Answered Essay: Question: Question. Lambert, Inc. is a manufacturer of men's casual clothing. The founder and CEO of the co…

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Question: Question. Lambert, Inc. is a manufacturer of men’s casual clothing. The founder and CEO of the co…

Question.

Lambert, Inc. is a manufacturer of men’s casual clothing. The founder and CEO of the company retired on June 30, Year 1, after 10 years of management. During this time, sales and net profits increased modestly, but the CEO was very conservative about taking credit risk.

On July 1, Year 1, Lambert hired a new CEO with a strong marketing background. The company adopted a new business plan, which includes aggressive expansion into new markets and liberalization of the company’s credit policy. This new business plan was implemented in the fourth quarter of Year 1, and resulted in a significant increase in sales for the month of December.

Lambert uses the allowance method to record doubtful accounts for financial statement reporting. In prior years, Lambert estimated its uncollectible accounts receivable by applying an estimated percentage to each category reported on the accounts receivable aging analysis. This percentage is based on historical data. The following table summarizes the accounts receivable aging analysis at December 31, Year 1, and the related estimated percentage uncollectible for each category.

Accounts Receivable Aging Analysis
at December 31, Year 1
Aging Category Balance Estimated

Percentage

Uncollectible

0 – 30 days $225,000 1%
31 – 60 days $240,000 9%
61 – 90 days $127,000 23%
over 90 days $85,000 60%

The balance in the allowance for doubtful accounts at January 1, Year 1, was $62,000. The activity in this account during Year 1 consisted of the write-off of accounts valued at $19,000 and a recovery of $4,000 in accounts that were written off in previous years.

The Lambert accounting staff identified the following unrecorded adjustments while performing the year-end review of accounts receivable balances:

An account receivable for $12,000 that was invoiced in February, Year 1 was deemed uncollectible because the customer was declared bankrupt on November 30, Year 1. The balance has not yet been written off.
An account receivable for $5,000 that was invoiced in August, Year 1 was collected. However, it was not properly removed from the accounts receivable subsidiary ledger and the aging analysis.

As a result of the change in the Lambert credit policy during Year 1, the CFO believes that the estimated percentage uncollectible for each aging category should be increased by two percentage points.

Question.

Assume that the Lambert accounting staff has already made all necessary adjusting entries at December 31, Year 1, with the exception of the adjustment to record the current-year’s bad debt expense. Use the information in the Information tab and the values you calculated in the Allowance Calculation task to prepare the journal entry that records the bad debt expense for Year 1, if any.

To enter an account, double-click the appropriate shaded area and choose the account title from the list provided.
Insert the correct debit and credit values in the appropriate shaded cells in the form.
Some shaded areas may not be used and certain accounts may be used more than once.
Account Debit Credit

Expert Answer

 

BAD DEBT EXPENSE DEBIT $72060

ALLOWANCE FOR BAD DEBTS CREDIT $72060

Receivables more than 90 days are adjusted for uncollectible amount of $12000 and unrecorded amount of $5000 ($85000-$12000-$5000) and uncollectable % is increased by 2 percentage points for each category.

Required allowance comes to $107060 and balance in allowance for bad debts after adjustment is $35000 ($62000 opening balance+$4000 Recovered debts -$19000 write off accounts-$12000 uncollectible debts).

Accordingly current year entry for bad debts expense is $72060 ($107060-$35000)

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